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Monday, March 20, 2017

Bill Mitchell — Amazing what politics does to people

A fiscal strategy that restrains net public spending to keep the economy below the inflation barrier does not, inevitably, mean a fiscal surplus is required. In fact, a fiscal surplus would only be indicated if the economy had a very strong external surplus, the private domestic sector was saving overall at its desired level, public infrastructure and services were first-class and the economy was at full employment.

That conjunction of events is rare.….

… a counter-cyclical fiscal strategy does not mean that the government should achieve a surplus. To think otherwise is to demonstrate a lack of understanding of the main sectoral aggregates and why they interact at various levels of economic activity.

The concept of counter-cyclicality more correctly refers to the direction of change of the aggregate. The government should certainly not be expanding its deficit if the economy is already at full capacity and it is satisfied with the private spending mix. Such an expansion would be pro-cyclical. But holding a steady deficit where the external deficit is steady and the private domestic sector is saving overall and content with that outcome is not pro-cyclical.

Under those circumstances, growth would be steady, and, hopefully, sufficient to absorb all the available capacity....

Bill Mitchell – billy blogAmazing what politics does to peopleBill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia